Do You Need Credit Insurance?
Almost every time you apply for a loan or other form of credit, you are asked if you would like to purchase credit insurance. It my even be automatically added to your contract without you noticing. This is an insurance policy that guards you against the risk that you will not be able to meet your repayments.
It is usually optional, however it is sometimes necessary to secure the loan such as a mortgage.
You should be aware that it is illegal for a lender to include credit insurance or other optional products into your loan without your knowledge or permission.
Credit insurance comes in four main types.
- Credit life insurance: which pays off some or all of your loan in the event of your death.
- Credit disability insurance: covers accidents, illness and other injuries that might mean you cannot work or pay back your loan.
- Involuntary unemployment insurance will make your payments if you lose your job due to no fault of your own, such as a layoff.
- Credit property insurance protects the property that is used to secure a loan in the case that it is lost or destroyed.
If you are considering taking up credit insurance, think first about your needs, shop around so you are aware of your options and consider the price of the insurance. Credit insurance can often turn out to be very expensive and the benefits relatively low.
For example, you may get a much better deal if you have life insurance or directly insure your property. Before agreeing to the optional extra insurance, you should consider:
- How much does it cost?
- Will it be added to your loan amount, in which case it will increase your monthly repayments.
- What other payment options are there, for example paying for it monthly instead of adding it to the loan.
- Does it cover the full amount of the loan and for the full length.
- How much lower would your loan repayments be without it.
- In what cases will it actually pay out and for how long. What are the exclusions and limits of your cover.
- Does the coverage become effective immediately.
- Can you cancel the insurance and is there a penalty for doing so.
Credit insurance is a very lucrative business for the companies that offer it and in many cases you will be paying for something you do not need. If you do not want credit insurance do not take it. In most cases the lender cannot deny you credit because you refuse optional insurance and they definitely can’t insist you buy it from them.